Setting Targets for Your Scorecard Metrics

When managing your organization’s strategy with a framework like the Balanced Scorecard, perhaps the only thing more difficult than determining which measures—metrics, key performance indicators—to use to track progress is deciding what your targets for those measures should be.

If your scorecard is using metrics that you have used in the past, determining targets can be pretty simple. You can look at the trend in the metrics over the past few years (say, the past 3 years) and figure out what the growth rate was.  If it was 10% per year, would 12% for the upcoming year be a good stretch target? Or, are you happy to continue the current growth rate?  This should be pretty straightforward decision.

The problem a lot of organizations encounter is when they are introducing new measures that they have never tracked before.  How do they then determine good targets?  And, the problem is often compounded by the intention to use their scorecard to award incentive pay to executives, managers, and even staff.  Setting the wrong targets in this situation can be very dangerous if you aren’t sure what they should be.  Set a target too low and employees may be awarded a windfall. Set a target to high, no one earns a bonus, and employees get discouraged.

If you can help it, don’t use these new measures and targets to award incentive bonuses.  You don’t have to use every KPI on your scorecard for incentive pay. In fact, using too many can make the formula overly complicated and hard for employees to understand—keeping it simple and straightforward allows employees to have better line-of-sight from their work to the incentive formula.

However, if you have to use the new metrics, wait a year.  Use that year to test the metric, see what the data is telling you, and then set better targets using that historical data. 

This also helps with telling the story and explaining why picking the measure with the target isn’t arbitrary.  Leadership can say, “Last year was a good year and Measure A increased by X%.  We want this coming year to be even better so if we can work hard and increase Measure A by (X+3)%, everybody in the company’s bonus will go up by 20%.”  After all, you are your best benchmark.